Accounting Principles Flashcards
What are the key financial statements that companies provide?
- Profit and loss accounts.
- Balance sheets.
- Cash flow statements.
What is the difference between management accounts and financial accounts?
Management accounts are for the internal use of the management team
Financial accounts are the company accounts that are required by UK law (Company’s Act 2006).
What is the difference between a profit and loss account & a balance sheet?
A profit and loss sheet shows the companies income and expenditure and the resulting profit or loss.
A balance sheet shows what a company owns (its assets) and what it owes (its liabilities) at any given point.
What is a cash flow statement?
It is the actual or anticipated ingoing and outgoing of a company over the accounting period.
Explain your understanding of capital allowances, insolvency and sinking funds?
Capital Allowances - Tax relief for certain items purchased for the business, for example tools and equipment.
Sinking Funds - Sums that are set aside for future expenses or long term debt.
Insolvency - An inability to pay debts, where debts exceed assets.
What are liquidity ratios?
Liquidity ratios = current assets / current liabilities
Liquidity ratios measure the ability of a company to pay off its current liabilities by converting its assets into cash.
The ratio is usually 1.5 although this depends on the sector the company is operating in. For example, house builders often operate with a liquidity ration of 3 because they hold high value assets in unsold houses.
A ratio of less than 0.75 can be an early indicator of insolvency.
What are profitability ratios?
Profitability ratios measure the performance of a company in generating profits.
Trading profit ratio margin = turnover (cost of sales/ turnover).
Low margins may be due to a growth strategy from the company and do not result from bad management.
What are financial gearing ratios?
These measure the financial structure of the company and are indicators for external supplier of debt as well as for internal management.
They help to measure solvency.
Highly ‘geared’ company’s relay on borrowing & the payment of interest reduces profit.
What is the purpose of a Profit and Loss account?
To monitor and measure profit and loss
To compare against past performance and against company budgets.
For valuation purposes and to compare against competitors.
To assist in forecasting future performance
To calculate taxation.
What is the difference between debtors and creditors?
Creditors are business entities that are owed money by another entity that they have extended credit to. For example, if you have provided services to a client and they owe payment of your fees, you become a creditor to the client.
Debtors are business entities that owe money to another respective company. For example, if you have used a sub-consultant and still owe them payment of their fees then you become debtors of a sub-consultant.
What are management accounts?
These are accounts used for internal management use.
Accounts prepared for a lender, such as a bank, to evaluate how you’ll be able to repay the funding.
These accounts are not to be audited externally.
What is a financial statement?
These are forecasts of income and expenditure that can be used as an analytical tool to identify shortfalls and surpluses.
What is a profit & loss account?
They demonstrate a companies sales, running costs and resulting profit or loss over a period of time (usually 1 year).
They are used to compare sales vs expense.
They can also be used to identify works that are not profitable.
What is a balance sheet?
It shows what the company owns in terms of assets and liabilities.
The balance sheet can demonstrate the value of the business at any given time.
What is a cash flow forecast?
A cash flow forecast summarises the cash, or cash equivalents both entering and leaving a company or project entity.
On construction projects this is usually shown as an ‘S’ curve.
In terms of a project entity, there is usually a small financial outlay at the start, a steep increase outlay towards the midpoint and a taper towards the end.